Short-term challenges

Slow growth ahead

Despite concerns about the risk of a hard landing, the Australian economy made it through 2023 in fairly good shape, helped by a resilient labour market, buoyant business conditions and strong commodity prices. Risks of a recession this year are low, but that doesn’t mean things will be easy. 

Inflation and cost-of-living continue to bite

Inflation is moving in the right direction but is still too high. It is likely to remain the focus of economic policy and public debate throughout 2024. Globally, inflation is clearly receding. This will assist the Australian outlook. However, domestic inflation is increasingly homegrown and driven by demand for services, rather than imported through goods. This may prove more difficult to contain, and will make it harder to reset the inflation expectations of both consumers and businesses.

Unemployment is likely to rise 

One of the positive outcomes of 2023 was the resilience of our labour markets – with low unemployment rates, shrinking underemployment and increases in participation. The unemployment rate stayed near historic lows for longer than expected, remaining under four per cent throughout the year.

The Federal Government and RBA must be on the same page 

2023 proved a challenging year for coordination on economic policy, with monetary and fiscal policy at times appearing to be heading in opposite directions, particularly on inflation and cost-of-living relief. The Federal Government has also renewed its commitment to full employment at the same time as the RBA has suggested that an increase in unemployment is needed to bring inflation sustainably under control. These tradeoffs need to be openly discussed and there should be a clear narrative and direction around goals and timing.

Housing shortages will continue and pressure governments to act

Governments must take tangible steps to fix the acute housing shortages throughout much of Australia in 2024. The problems in the housing market have been building for some time, and cannot be resolved overnight, but the pace of reform must be ramped up. We risk significant intergenerational inequality and further entrenching disadvantage in some parts of the community if we cannot provide affordable and adequate housing across the country.

Increased labour mobility and dynamism can put the right skills in the right places

Many of the occupations in shortage have had an inadequate supply of workers for more than two years. 

Enhancing mobility and dynamism in our labour market are critical steps to relieve these shortages, and should be addressed by refining occupational licensing settings and leveraging new technologies like artificial intelligence.

As CEDA research has shown, occupational licensing is widespread in Australia, covering one in five employees. Stringent conditions that go beyond what is needed to protect safety and rules that don’t recognise skills and experience gained interstate limit both the supply and mobility of workers, exacerbating shortages and driving up prices. 

Diversity and inclusion

Firms benefit from hiring from a larger, more diverse group of workers as they are more likely to find a worker with the skills and talents to match the firm’s needs. Diversity within teams also enriches the quality of inquiry, problem solving and decision-making. 

CEDA analysis of the Household Income and Labour Dynamics in Australia (HILDA) data Release 22, which includes responses from the second half of 2022, has found that workers with a health condition or disability that affects their ability to work (an impactful condition), women with children and carers have significantly increased their workforce participation in occupations that have made large transitions to remote work since the pandemic (or “WFH occupations”). 

We find that these groups have increased their labour force participation by significantly more than other comparable workers. This suggests that the pandemic acceleration of WFH and a strong labour market have contributed to overcoming barriers and stereotypes that have until now limited participation for these groups. 

WFH has contributed to a larger increase in labour force participation for some groups

The Government’s plans place much of the burden on the electricity sector. While this reflects the ready availability of renewable-generation projects, there are big challenges to recruit the skills, expand the networks and get the planning approvals necessary to roll these out at sufficient scale.

Investment in renewable energy has boomed over the past decade, but large-scale investment has been in gradual decline since the Renewable Energy Target was met in 2020, reducing the incentive for new generation. Prior to the expansion of the Capacity Investment Scheme in late 2023, state-based measures were only on track to deliver around 70 per cent renewables by 2030. Investment slowed further over the past year due to higher project costs, complex permitting processes, a congested grid and intensifying global competition in the race to net zero.